An update on hyperinflation

I recently read an article from a respected economic journalist. In his article Mike made a rather compelling, although somewhat complicated argument for why hyperinflation is highly unlikely. He dismissed the likelihood of common examples such as Zimbabwe where a loss of faith in the currency caused hyperinflation or WWII Germany where the paper money printing for war reparations caused hyperinflation, happening in the USA. He stated that hyperinflation follows by political decisions rather than fiscal policy.

Even with a master in economics (however in marketing and not macro/micro national economics) I feel I am not qualified to argue with that statement. However after reading an update on hyperinflation from economical analyst Gonzalo Lira, I tend to believe that Mike might not have considered some aspects of the problem.

So, why talk about inflation, or even hyperinflation when most politicians are concerned about the weak economy that has all but stagnated and is on the verge of deflation? Well, what they don't realize is that the current predicament that we are in is not setting us up for a normal inflation. While prices in commodities are rising dramatically, other consumer goods will likely loose its value (as they have been doing already). Consumers will have to divert their spending in luxury goods to more essential goods such as food, electricity and means of transportation.

For this reason I think that Gonzalo Lira's predictions of CPI (consumer price index) indicating strong inflation in the beginning of next year and hyperinflation towards the end of it might be wrong in a way. However, this does certainly not mean that the problem that he describes is not there. Prices in essential commodities will rise, and will probably lead to an increase in price on a whole range of goods and thus increasing CPI. But perhaps not by as much as it should be. An important reason for why CPI will be highly undervalued is due to they way it is being calculated. In an earlier post I described how CPI is subject to a number of subjective adjustments with the purpose of presenting a number that is within the parameters of what is acceptable. These adjustments will probably be increased when prices start rising next year.

Exactly how this will affect the actions of fiscal politics is hard to say. I would say though that it will contribute to a population that is even more unprepared for the time when the reality can no longer be hidden and the high prices are affecting peoples ability to acquire the basic needs for survival.

It should be noted that people outside of the USA will not remain unaffected. Europe's economy is far from stable and price increase will hit European countries as well. If the dollar cannot be prevented from crashing, it will most likely lead to a crash in most other larger currencies as well. Fortunately, it is in so many peoples interest that the dollar does not crash, and in the event that they start handling their cards right, there might be a chance that it remains afloat for some time more. Time will tell, although one thing is certain, I will not sit idly by waiting for that day to happen.